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Key SaaS Metrics: Lifetime Value

Lifetime Value (LTV) is the sixth of seven key SaaS metrics used in our framework and builds on expected lifetime (eLT) to determine the net economic value of the average customer. If you haven’t yet read about the prior five metrics, I suggest you start here.

Step 6: Calculate LTV – Lifetime Value

LTV is the economic value, net of costs, delivered over the life of a customer. While GMPP is a great tool for comparing the efficiency of different components from a time-to-payback perspective, LTV takes it one step further to incorporate eLT. LTV can be derived by multiplying the RGP by eLT, and then subtracting tCAC (LTV = RGP x eLT – tCAC). As previously noted, we encourage discounting future cash flows for the time value of money, but for simplicity we have not shown that here.

Because the fully burdened cost to acquire a customer and any variable recurring cost required to support the customer has already been removed, LTV goes towards paying off the remaining fixed costs in the business – G&A and R&D – where significant operating leverage can be found with scale.

As Figure 6 illustrates, LTV can vary significantly between channels. In our example, the CPC channel provides more than four times the lifetime value of the affiliate channel, despite having a total cost of acquisition that is more than twice as expensive.